The Strategist

The Great Fall of Gold Prices

07/20/2015 - 14:56

The first since 2009 disclosure of gold reserves in China turned into a big sale of the precious metal. On Friday, the gold price fell to the lowest since 2010, and has been reduced by 2.2% by today.
With the opening, the prices fell even more - nearly 5%, platinum prices also showed a strong collapse, losing in an instance about 5%. Published on Friday, data on gold reserves occurred to be below market expectations. This factor has a negative impact on prices, for quite a long time, market participants were confident that China buys physical gold, providing more than adequate demand.

Recall, last Friday, the authorities of China for the first time since 2009 has published data on its reserves of the precious metal. During this time, they have grown by 57% and amounted to 1,658 metric tons. This figure was clearly lower than market expectations. The experts were confident that China buys almost half of the physical gold market, which provides a steady demand. Alas, the reality turned to be quite different.

- The market is in a pronounced ‘bear’ phase, where all the news are accompanied by the fall in prices, - told David Baker, managing partner of Baker Steel Capital Managers in Sydney. He also said that investors expected gold stocks to be much bigger.

Another reason for the fall in gold prices, of course, is the policy of the Federal Reserve, more precisely, a rate hike in the near future. The Fed chief Janet Yellen last week confirmed her intention to tighten monetary policy this year.

However, the Fed's policy can be called new only by a long stretch of imagination. Experts associated such a strong drop in the Asian session with possible stop-loss, which has little in common with the fundamental component.

The precious metal’s drop is followed by a general release of investors from commodity assets. For example, Bloomberg Commodity Index has been declining for the fifth consecutive session. It is the longest downward since March this year.

It should be noted that, perhaps, the financial market will not accept gold as a defensive asset, neither it can be called a cash equivalent. By the way, when four years ago Ben Bernanke was asked about the gold, he answered that it is not money, but only one of the assets. The current situation confirms the view, which, incidentally, coincides with the point of view of many central bankers in developed countries. On the other hand, there is another opinion: Fed, with the help of banks, deliberately understate the value of gold to keep the dollar as a reserve currency.

Stocks in China

China's gold reserves increased by 57%, the country's authorities have provided official data for the first time in six years. The country has increased the volume of gold to 53.31 million ounces (1,658 tonnes), the People's Bank of China’s statement said. This figure increased from 33.89 million ounces (1,054 metric tons), recorded in 2009, when the controller had last revealed the official data.

China is the fifth in volume of gold reserves in the world, according to the World Gold Council (WGC). The United States ranked first, the amount of gold reserves of the country is 8,133.5 tons. However, the last WGC report was published before the publication of official data from China, so the country still holds the 7th place there.

Despite the fact that in today's world, paper money are not backed by gold, expensive metal still makes up a large part of the reserves of the central banks in the US and Europe. China has become the second largest economy in the world in 2010 and stepped up efforts to internationalize its currency.